If you’ve turned on the news or opened up social media in the past few months, you’ve likely heard the word inflation. Repeated.
Rising inflation rates make many people worry about their money and their future. Should you be concerned about how inflation is affecting property investments? First, let’s cover the fundamentals of inflation.
What is inflation
you can imagine inflation In two ways.
It is the devaluation of the currency over time or the decrease in the purchasing power of a currency.
Either way, it means the same thing to our wallets. Money just doesn’t go as far as it used to. Even if we haven’t spent or lost any money at all, what we have cannot buy so much.
Inflation is often measured by the Consumer price indexthat tracks the cost of a long list of goods and services at any given point in time. Current prices can then be compared to previous prices to see how much the cost has increased. When prices go up, it’s inflation. If they go down, it’s deflation.
For example, milk was $ 1 a gallon in 1960. In September of that year, a gallon of whole milk cost an average of $ 3.68. Remember when gasoline used to cost less than $ 1 a gallon? Well, it currently costs an average of $ 3.40 across the country.
While prices in certain sectors naturally rise and fall due to various industry factors and demand, they have mostly risen slowly but steadily over the years.
We have seen relatively low inflation rates over the past decade. They averaged 2 to 3% per year, but the 2010-2020 inflation rate averaged just 1.8%. The last twelve months? You are a different story. Inflation rates peaked in the past year that have not been seen in more than 30 years, as this chart from the New York Times shows.
What caused the inflation we are seeing now
There is no easy answer to this question, except “It’s complicated”. Even economists disagree on this Reason for inflation. The fact is that it is situational and caused by several factors.
The explanation that makes the most sense to me is that inflation occurs when monetary growth outstrips economic growth. Well, the government recently printed $ 3 trillion, which means 40% of all money in circulation was created in the past 12 months.
If more money is spent on the same product while demand remains the same, the price of that product will increase over time.
So if your money is in a low-yielding savings account or other super-conservative investment option and inflation occurs around it, that money actually loses value.
How can you prevent that?
Well, it means we have to invest wisely to at least keep up with the rate of inflation.
Real estate investments are known as the great hedge against inflation for a reason. Indeed, inflation can be one good thing for real estate investors when they play their cards right.
This is how real estate investors can benefit from inflation
Here are 3 ways property investors can benefit from inflation
Inflation can help reduce debt
One of the most powerful tools for accelerating wealth and earnings in real estate investments is the use of leverage, or debt. You can benefit from this both as an active and passive real estate investor.
Inflation diminishes the money in your pocket, but it also diminishes the outstanding debt you have when they are at a lower floating or fixed rate.
For example, if you have a 30-year fixed-rate mortgage at 3.5% interest and you pay $ 4,000 per month, in year 25 you will still be paying that $ 4,000 monthly payment. Due to inflation, these 4,000 USD are actually worth paying a lot less in the future. Assuming a standard inflation rate of 2.5%, that $ 4,000 payment in 25 years would be almost half of today’s amount ($ 2,157).
So debts tend to lose their value, while …
When inflation hits, rents tend to rise. They are essentially “goods or services” that follow the inflation line.
Even in times of rapid inflation, rental demand tends to rise. As I will mention next, people tend to lose the price of buying houses and so the demand for rentals is increasing. More demand means increasing rents.
I think it is no coincidence that property prices are still rising rapidly across the country. Interest rates are low, inflation is high, and there is tons of cash out there.
So prices are rising rapidly and building equity for rental apartment owners.
Most real estate investors tend to use leverage and leverage and can benefit massively from real estate appreciation when they have only declined 20-30%.
Trends have shown that real estate values can at least keep up with inflation and often even outperform it.
We have lived in a fairly low inflationary environment for years and it sounds like the higher rates of inflation will persist for the time being. Investors need to adjust their strategies to stay ahead of the inflation rate.
So, if you are thinking about how to not only hedge against inflation but also benefit from it, real estate investments could be a great opportunity right now.